Legislative Trend Challenges Supply Chain Management

As John Oliver recently pointed out, “Sweatshops aren't one of those nineties problems we got rid of.” In fact, it’s been only two years since the Rana Plaza tragedy killed more than 1,000 workers and once again exposed rampant exploitation within supply chains.

The devastation of Rana Plaza, combined with an increased number of regulations, has created a groundswell of reform and pushed companies to consider practices that go beyond their legal liability and exposure. As many companies have learned, however, a patchwork compliance strategy is no longer an effective or practical approach in our global economy.

Consider this: If you're a multinational, publicly-traded company with a variety of products and revenue sources based in the United States and operational in the United Kingdom, by 2016 you may have to comply with four separate requirements on how you manage your supply chain’s labor issues. The information you would disclose to meet the requirements of California's Transparency in Supply Chains Act would also need to comply with the requirements of the U.K.'s new Modern Slavery Bill. You would also need to submit a labor recruitment compliance plan to the U.S. federal government to contract with them, and you'd need to provide the Security and Exchange Commission with information on how you audit for conflict minerals in accordance with the Dodd-Frank Conflict Minerals provision.

These laws, none of which required compliance before 2012, have changed the way companies approach their supply chains and operations. They create a complicated compliance tapestry, which may be burdensome to manage for companies that only see these laws through the prism of legal compliance.

Issuing compliance statements or plans, without understanding the strategic importance of how these issues are managed, equates to playing legislative Whack-A-Mole.

The U.K. Modern Slavery Bill, which is likely to affect more than 10,000 companies in 2016, will require companies to disclose what steps they are taking to address issues in their supply chains. Instead of issuing a simple disclosure statement, companies should streamline compliance by considering how these various mandates relate to each other and implementing practices that take into consideration the requirements of all laws, rather than approaching each requirement individually.

Best practices in action

Two recent examples embody this approach. Instead of focusing on the requirements of the law, HP is changing the way it does business. A recent report by Verité found that more than 1 in 4 recruited workers in the Malaysian electronics sector was a victim of forced labor. Recognizing that third-party recruitment practices often lead to exploitation, HP implemented a direct hiring process wherever possible and feasible.

As Stuart Pann, senior vice president of PPS operations for HP, explained, "This initiative underscores our commitment to continually improve our supply chain, one of the largest in the industry, and to demonstrating leadership that encourages other companies to advance their responsibility to protect vulnerable worker populations."

HP’s leadership recognized that addressing this issue extended beyond legal compliance. Addressing it required examining and changing business processes that contribute to labor abuses, either directly or indirectly. "Conditions that contribute to any form of forced labor are unacceptable in our supply chain," concluded Pann.

Late last year, Disney followed other industry leaders by publishing its list of 5,500 suppliers operating in 70 countries. At one time, supplier lists were just as important to the business as the product itself. Today, companies that align transparency norms with their business operations understand that providing more information can be helpful for their reputation and business.

Considering how these laws influence the market, even if a company does not need to directly comply with them, is important. Such practices, which are required by transparency laws, have begun to influence industry groups and the practices of individual companies. For example, in part responding to the U.S. Executive Order 12627 on exploitative recruitment practices within federal contracts, the Electronics Industry Citizenship Coalition (EICC) amended its base code of conduct to prohibit recruitment fees from being charged to workers. Excessive recruitment fees may have a direct link to forced labor and other labor abuses.

Rob Lederer, executive director of the EICC, stated: "The support of our membership to further strengthen the EICC Code of Conduct and ban recruitment fees placed on workers demonstrates the industry’s commitment to combat forced labor worldwide."

By adapting its base code, the EICC is raising the profile of an issue like exploited recruitment practices, which is inherit to the business decision on whether to use labor recruiters or endeavor to hire directly. EICC members may now consider how to implement and monitor labor recruitment practices, even if they are not subject to the executive order.

Taken in isolation, these laws can be considered a clear and straightforward compliance process. However, much like a company’s supply chain, the process is not siloed and must be managed holistically.

Companies affected by these laws should take into consideration the greater context before acting. Searching for resources, such as those listed on KnowTheChain.org, or consulting with industry experts, can help a company think strategically about how to address these issues.

As these new laws clearly indicate, expectations of companies have changed. Consumers, investors, government officials and other stakeholders believe that companies play an important role in addressing some of the most intractable social problems. Companies that choose to see their responsibility through the context of legal disclosures are shortsighted. Laws that require company engagement with these issues are bound to increase. As more companies look to be seen as global citizens, thinking strategically about these issues will be good for business.

Image credits: KnowTheChain

Kilian Moote is Project Director of KnowTheChain and an expert on supply chain transparency and legal disclosure. Previously, he conceptualized and led Free2Work, a risk assessment and evaluation tool, created with the U.S. State Department, focused on promoting transparency in supply chains. In the past, Kilian has served as an adjunct faculty member on corporate social responsibility and sustainable supply chain management at the University of San Francisco and has lectured at the University of Technology, Sydney.